across the bar

Family Trusts vs Testamentary Trusts

by Nicci - Posted 16 March 2010

A Trust can be formed in one of two ways:  either while you are alive (inter vivos) where an individual wants to place assets in a trust for specific beneficiaries or in terms of a Will (mortis causa).

Trusts are used primarily in Wills to protect the inheritance of minors and only come into effect after the death of the testator.  The bequeathed assets are then protected until the beneficiaries are old enough to inherit, i.e. 18 years old.  This is also a useful tool if the testator wants to prolong the time period before the actual asset transfers to the beneficiary, as the testamentary trust can be structured in such a way that the inheritance only passes to the beneficiary at an age older than 18, i.e. when the beneficiary turns 30.

Any asset can be placed in an inter vivos trust - immovable property, cash or shares and the asset, once transferred, belongs to the Trust and will not be taken into account for the purposes of valuing your personal estate.  This type of trust works well when the asset held by the trust is a family beach house or farm.

All trusts have to appoint trustees, who manage the assets of the trust on behalf of the beneficiaries.  In a testamentary trust, the Will itself is the trust deed and contains instructions on how the trust is to be managed and the powers and duties of the trustees.  In an inter vivos trust, a trust deed is drafted and registered with the Master of the High Court and sets out the powers and duties of the trustees.  The trustees can only act on behalf of the trust once the Master has issued Letters of Authority to do so.

It is recommended that at least three trustees are appointed in a family trust and at least one of these trustees should be an independent party, eg. an attorney, accountant or a trust company.  A separate bank account in the name of the trust must be opened and all financial transactions relating to the trust must be recorded through this bank account.   SARS also requires all trusts to be registered for income tax purposes, so careful record keeping is a prerequisite for trustees.

 

 

 

 

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Proposed tax breaks for primary residences

by Nicci - Posted 06 October 2009

Individuals who own their primary residence in a Company, CC or Trust, can transfer their property into their own name/s without having to pay Capital Gains Tax, Transfer Duty or Secondary Tax on Companies from 11 February 2009 to 31 December 2012.   

The Taxation Laws Amendment Bill has now been extended to include Trusts as well.  The amended section includes the transfer from a Trust to a beneficiary of that Trust if the beneficiary is resident in the home and had contributed to the cost of acquisition and maintenance of the home.

The requirement for an individual to qualify is that they must personally have resided in the home from 11 February 2009 to the date of transfer.  Tenanted properties or holiday homes would therefore not qualify.

For more information, contact Nicci on (021) 465 9175

 

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pre-incorporation contracts under the new Companies Act

by Nicci - Posted 06 October 2009

A pre-incorporation agreement is an agreement concluded on behalf of a legal entity (eg. a Company) that is still to be formed.    S35 of the Companies Act 61 of 1973 allows for a person to act as an agent of a company that doesn’t yet exist and for companies to conclude pre-incorporation agreements.

The requirements are:

-          The agreement must be in writing;

-          The memorandum of association of the company on its registration contains as an object of the company the adoption or ratification of the agreement;

-          The person who concluded the agreement professed to act  as an agent of the company;

-          2 copies of the agreement must be lodged with the Registrar of Companies with the application for registration of the Company.

 S35 does not determine the nature of the rights and obligations of the agent.  The agent , acting on behalf of the company to be formed,  is not bound to the other contracting party if the company is not formed or if the company refuses to ratify the agreement.    Hence the reason for inserting a clause in a pre-incorporation agreement specifically holding the agent personally  liable should the company a) not be incorporated or b) the company refuses to ratify the agreement.

S21 of the new Companies Act 71 of 2008 changes the current position.   It provides that a person (“promoter”) may enter into a written agreement in the name of, or purport to act in the name of a company to be incorporated and the Board may ratify or reject the pre-incorporation agreement within 3 months of incorporation.  If the Company does nothing, it is deemed to have ratified the agreement and the promoter is not personally liable ito the agreement.  However, if the company is not incorporated or, after being incorporated, it rejects the agreement, the promoter is automatically personally liable ito the agreement entered into.

For more information, contact Nicci on (021) 465 9175.

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Can a company help buy its own shares?

by Steve - Posted 13 June 2009

Section 38 of the old Companies Act severely restricted a company from providing financial assistance for the purchase of its own shares. The Act was amended in 2006 to allow for assistance to be given by the company under the following circumstances:

1. Where the board is satisfied that, immediately after providing the financial assistance, the Company will remain solvent; and

2.The terms on which the assistance was given were fair and reasonable to the company and were approved by special resolution.

These amendments have been carried through to section 44 of the new Companies Act of 2008.

Solvency and liquidity test

In assessing the solvency of a Company, the board must be satisfied that, after the assistance is given:

1. the assets of the company will exceed its liabilities; and

2.the company will be able to pay its debts as they become due in the ordinary course of business.

Personal liability

A Director may be held personally liable if he was present at the meeting when the decision or agreement was reached to provide financial assistance contrary to the requirements set above and he did not vote against that decision or agreement, despite knowing that providing the assistance was contrary to the Act or the company’s Memorandum of Incorporation.

 

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New Companies Act tightens up director's duties

by Steve - Posted 13 June 2009

In recent years the various King Reports on Corporate Governance have recommended more accountability for directors of companies. These recommendations have found their way into the new Companies Act which was signed in April 2009. 

The Act introduces a number of important changes to the roles and duties of persons acting formally or informally as directors. The changes have been anticipated by most directors holding office in public companies. However, directors of smaller private companies are still going about their business as usual. With the threat of criminal sanctions and personal liability, we encourage all our clients who act as directors of their companies or other companies to come up to speed with the requirements of the new Act before it takes effect.

NicciFerguson offers one-on-one director training and support to entrepeneurs running private companies. Contact Steve or Nicci to find out more.    

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Search engine to find venture capital funds

by Steve - Posted 10 March 2009

Interesting idea for entrepreneurs looking for venture capital.

http://bits.blogs.nytimes.com/2009/03/09/a-search-engine-for-seekers-of-venture-capital/

SA venture capital funds could do something similar. If the whole process is made easier, should uncover more diamonds in the rough. 

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Writing software at work - new SCA judgment

by Steve - Posted 07 December 2008

The Supreme Court of Appeal in King v SA Weather Service was asked to decide who was the owner of certain software written by an employee (King). The main question to be answered was whether he had written the programs within the course and scope of his employment? 

The court held that although King's job description (as a meteorigical technical officer) did not formally include computer programming when he was employed, his job had evolved to the point where he was spending 50% of his employment time on system development and programming (this contradicted King's evidence that he had developed the programs at home and in his own time).

The court also found that the relevant software was directly related to the employer's business and had been developed by King so that he could do his job better. He had also been asked to write other programs by his employer according to a prescribed format which had to be approved before the programs were implemented. None of the programs developed by King were used or exploited outside his employment. 

The court held that King had written the programs within the course and scope of his employment and that the employer was the owner of the software.

The court did not want to set down any rules relating to this issue and instead said that each case would need to be decided according to its own facts. The court also said that the creating the work at home would not be conclusive in deciding who was the owner of the work.           

Our R0.02

Because there are no hard and fast rules on this, you should probably agree with your employer upfront before you start a project on your own time, that they will not assert ownership over any copyright that comes of it (good luck with that!).

You would probably be well advised to avoid writing anything which is remotely useful to your employer's business or from which they can gain some form of advantage. 

   

 

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trading in insolvent circumstances

by Steve - Posted 14 October 2008

If you are a director or a member of a small company or close corporation who is responsible for the daily management of business affairs, knowing when to pull the plug may not only be a good business decision it may also save you from personal liability. 

The basic rule is that if a company continues to trade when the director's know that the company is trading in insolvent circumstances, they open themselves up to potential liability. The question they need to ask is: can the company pay all its debts as and when they become due and payable? 

If the company continues to trade and incur further debt when it is already unable to pay all its existing debts, the directors may be held to be running the business recklessly. This can open them up to personal liability for loss suffered by a creditor during the time when such reckless trading takes place. 

If, however, the directors honestly and reasonably believe that they can trade the company out of its current difficulties, they may be able to avoid liability. 

Our R0.02: 

If you are not hands on with the financial management of the business, work closely with your fellow directors or company auditors who are to make sure that warning signs of financial distress are picked up quickly.

If you run a small business, chances are you see the company or cc more as an extension of yourself rather than a seperate legal entity. Don't let your pride or ego get in the way of making a sound business decision to close the doors. If you are worth your mettle as an entrepeneur, you will learn from the experience and your mistakes and will do better next time. Unfortunately, there may not be a next time if you lose the benefit of limited liability and are held personally liable for the debts of the business.         

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Members of CC's take heed

by Steve - Posted 10 January 2008

The business section of the Cape Times ran a story on the Cape High Court case of Airport Cold Storage (Pty) Ltd v N Ebrahim and others warning members of CC's of a new law that can hold them personally liable for the debts of the CC. The law is not new and has always been part of the CC Act. But the case does send a reminder to people running businesses through close corporations that if they do so in a loose and informal manner without complying with the Act, they could be without the protection of limited liability and left to foot the bill themselves.

Here is the rap sheet for the members in this particular case:

1. They bought a shelf cc and changed the sole member but not the registered office and accounting officer in the records of the Company Office.
2. They continued to operate for more than 6 months without an accounting officer.
3. They failed to keep proper accounting records and books of account.
4. They failed to disclose the corporate name of the cc in official documents (orders, invoices) and only stamped these documents with its trading name.
5. the cc was one of a number of different corporate entities which formed one big family business. This in itself is not a problem, but they also shared premises, contact details, assets, bank accounts and book debtors amongst themselves. This created the overall impression in the mind of the court that the business of the cc was not being conducted for its own interests but rather for the individual members of the family and their own personal estates.  

Our R0.02
If you decide to run a business through a close corporation, get on top of all the duties and responsibilities required of you as a member.  When acting for the cc always ask the million dollar question: Does this advance the interests of the close corporation? (not does it advance my own personal interests). If any course of action benefits you as a member but prejudices the cc's creditors, get advice first.       

We have prepared a Free Information Sheet to assist you with the nitty gritty of the Act so send us a mail and we will send it on to you.     

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reminder to directors when signing cheques

by Steve - Posted 21 November 2007

If you are a director signing cheques for your company, make sure the company's full name and registration number is on the cheque. In Constantaras v BCE Foodservice Equipment , the Supreme Court of Appeal sent a reminder that the requirements of the Companies Act (and Close Corporations Act) in this regard are pre-emptory and cannot be excused even if the receiver of the cheque knew that you were signing on behalf of your company. If the necessary info is not on the cheque, you wil be personally liable for the amount reflected.  

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